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Daily Market Digest: BoJ’s Sato, ADP Payrolls, and ECB’s Policy

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Bank of Japan policy maker, Sato spoke today and said that negative interest rates would have a tightening effect under the current conditions. His comments, critiquing BoJ’s policies sent the yen higher, extending its gains. ADP payrolls showed private jobs rising 173k in May and April jobs data revised higher to 166k. ECB left interest rates unchanged and upgraded inflation forecasts, as expected.

Today’s Economic events

  • Japan monetary base y/y 25.50% vs. 27.20%
  • Australia retail sales m/m 0.20% vs. 0.30%
  • Australia trade balance 1.58bn vs. -2.11bn
  • Japan consumer confidence 40.9 vs. 40.4
  • UK construction PMI 51.2 vs. 51.9
  • Eurozone PPI m/m -0.30% vs. 0.10%
  • OPEC Meetings
  • ECB leaves minimum bid rate unchanged at zero percent
  • ADP private payrolls employment change 173k vs. 178k
  • US weekly unemployment claims 267k vs. 270k
  • BoE’s Carney speech

Coming up

  • US Crude oil inventories

Yen extends gains on comments from BoJ’s Sato

Bank of Japan policy member, Takehiro Sato speaking with business leaders in Kushiro, Japan said that the BoJ’s negative interest rate policy would have a tightening effect and spread the wrong perception about Japan’s economic condition. Considered a critic of BoJ Governor, Kuroda’s policies, Sato said “I believe that the negative interest rate policy has the effect of monetary tightening, rather than an effect of easing. In addition, the negative interest rate policy could affect financial system stability.”

The BoJ official said that negative interest rate would only be meaningful when the monetary base and asset purchase targets are tapered.

The yen has been gaining steady ground with the dollar falling for the third consecutive day after posting a 21-day high above 111yen on May 30th. Yesterday, Japan’s Prime Minister, Shinzo Abe confirmed the delay in the sales tax hike which is now put off for October 2019. He also announced plans for fiscal stimulus in autumn this year but did not elaborate on the scope and the size of the spending plans. Analysts watching the BoJ note that some form of coordinated action involving both monetary and fiscal spending could be on the horizon.

Yamada, chief forex strategist at Merrill Lynch Japan, says “What we are seeing is a temporarily adjustment after too much early expectations, some investors have closed out their dollar-buying positions ahead of U.S. jobs data due Friday, which could offer more clues on the Federal Reserve’s next move”

HSBC economist, Izumi Devalier notes that more details on the supplementary budget will be disclosed closer to the upper house elections in Japan, due in July and expects the BoJ to possibly expand its monetary stimulus program on June 15-16. “The government may be waiting until this date to reinforce the idea that Japan is already engaged in a form of ‘helicopter lite,’ where aggressive central bank asset purchases create the fiscal space for the fiscal authorities to engage in greater spending,” Devalier said.

ADP payrolls show 173k jobs added in May

Private payrolls processor ADP, in the monthly private payrolls report, showed that private businesses in the US added 173k jobs in the month of May. This was a modestly better print compared to April’s private payrolls data which was revised higher from 156k to 166k. The May report fell short of expectations of 178k jobs for the month. Most of the gains in the private sector jobs were driven by the services-oriented businesses, which combined added 175k positions. Goods-producing companies showed a net loss of 1000 jobs while manufacturing jobs were cut by 3000.

Reflecting on the above, the head of ADP research institute, Ahu Yildirmaz said, “Job creation appears to have slowed as we move further into 2016. Challenging global conditions affecting hiring at large companies and a tightening labor market for skilled workers are among the factors that may be contributing to the slowdown.”

Alongside the ADP reports, the weekly jobless claims data showed that the number of Americans applying for unemployment benefits fell last week. Initial jobless claims were down by 1k to a seasonally adjusted 267k. The report was for the week ending May 28th.

UK construction PMI disappoints

Construction PMI index in the UK fell to a35-year low in May, falling to 51.2 from 52.0 in April. Data from Markit showed earlier today. Analysts were expecting to see a print of 51.9 for the month. The data was the weakest print in construction PMI for nearly three years. Survey respondents said that new orders continued to contract for the first time since April of 2013. Businesses cited that the uncertainty stemming from the June 23 EU membership referendum was one of the reasons for retraining activity with most of the companies reporting that it was having a significant impact on businesses.

On the positive side, the employment index in the construction sector rose at the fastest pace in January while input prices continued to rise. On a 12-month outlook, businesses remained optimistic but were cautious that there could be a fresh round of job cuts if new orders continued to fall.

David Noble, group CEO, CIPS said, “Fears over weaker UK and global economic growth dealt a blow to confidence in the construction sector, leading to delays in new spending commitments.”

ECB leaves policy unchanged. Upgrades inflation forecasts

The European Central Bank decided to leave the interest rate on the main refinancing operations and the interest rates on the marginal lending facility, and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The ECB also announced that under the Eurosystem, starting June 8th, the ECB will being its corporate sector purchase program (CSPP) and will begin its new TLTRO-II auctions from June 22nd. The monthly asset purchases of €80 billion were also unchanged and is expected to run its course until the end of March 2017 or beyond if necessary.

In the introductory statement, the ECB said “The comprehensive package of decisions taken in early March underpins the momentum of the euro area’s economic recovery and fosters the return of inflation to levels below, but close to, 2%.”

The ECB also released its staff economic projections, noting that inflation would likely remain low or negative in the next few months before picking up in the second half of 2016. The ECB’s statement said that inflation rates could recover further into 2017 and 2018. According to the new projections, the ECB now expects 2016 HICP to be at 0.20% from March’s projection of 0.10% and rise to 1.30% (unchanged from March’s projection) in 2017.

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